Definition and Examples of Shelf Offerings
How Shelf Offerings Work
Types of Shelf Offerings
What Does This Mean for Individual Investors
Definition and Examples of Shelf Offerings
A shelf offering can be used to register offerings of common stock, preferred stock, debt, and any other type of registered securities. A shelf offering can be a primary offering, for example, the launch of new common shares. Shelf offerings are a way for companies that are already publicly traded to register an offering for sale at a later time. The offering can then be “pulled off the shelf” and brought to market quickly.
A shelf offering can also be a secondary offering, where existing securities such as shares held by company insiders are resold. Shelf offerings are cost-effective because companies do not need to go through the full registration process every time they want to issue new securities.
Shelf offerings can only be used by companies that are considered qualified issuers. Qualified issuers have the following qualifications: prior registration of a class of securities for sale, timely filing of all required financial reports over the past 12 months, conducting a significant business in the United States, and not defaulting on preferred stock dividends, debt, or lease payments.
Some companies qualify as well-known seasoned issuers (WKSIs). The qualifications include having a global market value held by non-affiliates of $700 million or more, or having issued at least $1 billion in non-convertible securities, excluding common equity, in the past three years in primary offerings for cash. Non-convertible securities (such as non-convertible bonds, for example) do not offer the option to convert into other securities (such as common stocks).
Companies can use shelf offerings to quickly raise new capital for launching a new product or acquiring another opportunity. Shelf offerings can also be utilized to quickly capitalize on favorable conditions.
For example, a real estate company might initiate a shelf offering in anticipation of a housing market improvement. Shelf offerings are also an effective way for companies to continuously bring new issues to market, perhaps to support a dividend reinvestment program for shareholders.
How Shelf Offerings Work
A shelf offering begins by registering the shelves using Form S-3 with the U.S. Securities and Exchange Commission (SEC). The registration discloses the type of security for the future offering, such as common stock, debt securities, preferred stock, etc. The registration includes a basic prospectus and an appendix used when the offering is “pulled off the shelf.”
The basic prospectus describes the offering, the company’s operations, and how the proceeds will be used. The registration is submitted to the U.S. Securities and Exchange Commission for review and comment, which usually takes several weeks. Shelf registrations by WKSI companies are automatically effective upon submission.
When the offering is “pulled off the shelf,” the company submits an additional prospectus to the U.S. Securities and Exchange Commission. The additional prospectus describes the terms of the offering, price, quantity, and other information required by the U.S. Securities and Exchange Commission. The “offering” is brought to market without delay for SEC review.
Types of Shelf Offerings
Continuous Offering: In continuous offerings, securities are offered immediately after the registration statement becomes effective. They continue to be offered during the registration period. Dividend reinvestment programs for companies are an example of these types of offerings.
Delayed Offering: Offerings are delayed at some point in the future – or may never occur at all. A delayed offering can be used to register existing shares held by insiders for resale in the future.
Offering
In the market: Stocks are sold through existing trading markets, such as the Nasdaq stock market or the New York Stock Exchange, at market price rather than a fixed price.
Over-the-wall transactions: Shelf registrations can be used by marketers to promote an offering to institutional investors before a public announcement. Marketers contact institutional investors about an upcoming offering without disclosing details. If investors are interested, the details of the offering are revealed. Over-the-wall transactions require shelf registrations to meet regulatory requirements.
Primary offering: A primary offering of new common shares has specific requirements. The company must have a total market value of voting rights and common equity held by non-affiliated persons of at least $75 million.
Secondary offering: The securities offered in a secondary shelf offering must be of the same class listed on a national exchange.
Investors can search for S-3 registrations of companies for shelf offerings in the SEC Edgar database.
What It Means for Individual Investors
Shelf offering registrations can give individual investors insight into the company’s plans for raising capital. Some analysts view shelf offerings negatively because new shares will dilute and lower the price of existing shares. Others see shelf offerings as a potential tool for debt repayment, which would benefit shareholders.
Source: https://www.thebalancemoney.com/what-is-a-shelf-offering-5201705
Leave a Reply